Inheritance Tax: Is Your Estate Covered?

With the value of homes continuing to increase over the past decade, and with the majority of housing wealth now being owned by older households, inheritance tax (IHT) continues to be an issue for many, despite the introduction of the residence nil-rate band (RNRB).

Recent figures have revealed that IHT receipts reached a record high last year, and there may be times when the nil-rate band and RNRB may not cover the full value of an individual’s estate on death.

Some key IHT reliefs

IHT is generally payable at 40% on the proportion of a taxable estate which exceeds £325,000.

A number of important reliefs apply to IHT, not least of which is the nil-rate band, which applies a rate of 0% to the first £325,000 of a taxable estate. For married couples and civil partners, any percentage of the nil-rate band which remains unused after the death of a partner can be carried forward and added to the nil-rate band of the surviving partner.

An additional relief, the RNRB, is currently being phased in. This allows a family home to pass to direct descendants, such as children or grandchildren. Provisions also exist to cover situations where someone has downsized, or sold to raise capital, for example to cover care home fees.

The RNRB is being increased in a series of stages, as follows:

2018/19

£125,000

2019/20

£150,000

2020/21

£175,000

This means that by 2020, a couple will be able to pass on total assets worth £1 million (£325,000 plus £175,000). There will be a tapered withdrawal of the RNRB for estates worth more than £2 million. This limit does not take business or agricultural reliefs into account.

Transfers of assets which are made between spouses are exempt from IHT – this applies to both lifetime transfers and transfers made on death.

Other forms of relief

Many smaller or regular lifetime gifts are exempt from IHT, whilst larger gifts may become exempt after seven years.

Gifts to charity have the potential to give an estate access to a lower rate of IHT on some assets, while unused funds in a private pension can pass directly to beneficiaries without being included in the chargeable estate.

The Chancellor has commissioned the Office of Tax Simplification (OTS) to review a range of aspects relating to IHT, and advise on ways in which the tax can be simplified.